CLO market quiet as investors watch ongoing financial market turmoil in China, Greece

By Rebecca Melvin

New York, July 9 – No new issues priced in the collateralized loan obligation primary market on Thursday and the secondary market has been mute this past week in the midst of credit concerns related to Greece, Puerto Rico and a plunge in China’s equities markets.

Attention seems to have shifted to the “far more important economy and financial markets of China,” Moody’s Analytics said in a report published Thursday.

While China’s Shanghai Composite index snapped back Thursday from a three-month low Wednesday, the index still remains down 28% from its June 12 high.

Moody’s points out that the Shanghai composite is still up by 82% from a year earlier and therefore likely to remain an issue for markets for some time.

More volatility possible

“To be blunt, though still down from June 12’s stratospheric yearly lift-off of 152%, the recent 82% yearly surge by the Shanghai composite still hints of speculative excess that might only be cured by lower share prices,” according to the Moody’s Wobbly World Menaces Credit Quality article.

The volatility has put a dent in credit markets already. Issuance is down not only in CLOs but also in other asset classes like high-yield debt for early July.

According to a preliminary estimate, worldwide offerings of corporate bonds for the second quarter showed annual percent changes of plus 5% for investment grade debt and minus 35% for high-yield debt, and U.S. dollar denominated supply rose 31% for investment grade and plunged by 21% for high yield.

For 2015, worldwide corporate bond offerings are likely to rise by 3% annually for investment grade and fall by 16% for high yield. Through the first 27 weeks of 2015, the year-over-year percent changes for corporate bond issuance were plus 17.7% for U.S. dollar investment grade, minus 6.0% for U.S. dollar high yield, minus 14.6% for euro-denominated investment grade and minus 43.1% for euro-denominated high yield, according to Moody’s.

For the last year through July 8, the U.S. composite high-yield bond spread widened by 179 basis points, which nearly matched an accompanying 184 bps climb by the average high-yield expected default frequency.

Moreover, the base metals price index over the past 20 business days plummeted by 10.2%, Moody’s noted.

“Not since September 2011 has this barometer of global business activity sunk by at least 10% over a 20-day span. Of special importance is how the 10-year Treasury yield’s average sank from the 3.2% of January-August 2011 to the 2.0% of September-December 2011,” according to the Moody’s report, which makes the case for a very strong correlation between the base metals price index and global economic growth.

The now glaring weakness of base metals prices complements recently downwardly revised estimates for the IMF's measure of global economic growth. The correlation between the annual percent changes of global economic growth and the base metals price index is a strong 0.82.

In the International Monetary Fund’s World Economic Outlook revision published Thursday, the bank cut its forecast for global growth, citing a weaker first quarter in the United States, and the U.S. growth outlook was downgraded to 2.5% for the year from an April forecast of 3.1% growth.

The IMF said that the outlook is murky due to financial market turbulence in China and Greece. But it left its growth forecasts for China and Europe unchanged. It also said it expects the world economy will grow at 3.3% in 2015, which was down from its 3.5% pace projected in April, and less than the 3.4% expansion in 2014.

This week, the IMF also reiterated its recommendation that the Federal Reserve keep interest rates unchanged at near zero until the first half of 2016, when wage and price inflation are expected to pick up.

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